Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume II Edited by Mathias Dewatripont, Lars Peter Hansen and Stephen J

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Cambridge University Press 978-0-521-81873-5 - Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume II Edited by Mathias Dewatripont, Lars Peter Hansen and Stephen J. Turnovsky Frontmatter More information

Advances in Economics and Econometrics

This is the second of three volumes containing edited versions of papers and com- mentaries presented at invited symposium sessions of the Eighth World Congress of the Econometric Society, held in Seattle, WA, in August 2000. The papers sum- marize and interpret recent key developments, and they discuss future directions for a wide range of topics in economics and econometrics. The papers cover both theory and applications. Written by leading specialists in their ﬁelds, these volumes provide a unique survey of progress in the discipline.

Mathias Dewatripont is Professor of Economics at the Universit´e Libre de Bruxelles where he was the founding Director of the European Centre for Advanced Research in Economics (ECARE). Since 1998, he has been Research Director of the London- based CEPR (Centre for Economic Policy Research) network. In 1998, he received the Francqui Prize, awarded each year to a Belgian scientist below the age of 50.

Lars Peter Hansen is Homer J. Livingston Distinguished Service Professor of Eco- nomics at the University of Chicago. He was a co-winner of the Frisch Prize Medal in 1984. He is also a member of the National Academy of Sciences.

Stephen J. Turnovsky is Castor Professor of Economics at the University of Wash- ington and recently served as an Editor of the Journal of Economic Dynamics and Control. He is an Associate Editor and is on the Editorial Board of four other journals in economic theory and international economics.

Professors Dewatripont, Hansen, and Turnovsky are Fellows of the Econometric Society and were Program Co-Chairs of the Eighth World Congress of the Econo- metric Society, held in Seattle, WA, in August 2000.

© in this web service Cambridge University Press www.cambridge.org Cambridge University Press 978-0-521-81873-5 - Advances in Economics and Econometrics: Theory and Applications, Eighth World Congress, Volume II Edited by Mathias Dewatripont, Lars Peter Hansen and Stephen J. Turnovsky Frontmatter More information

Econometric Society Monographs No. 36

Editors: Andrew Chester, University College London Matthew Jackson, California Institute of Technology

The Econometric Society is an international society for the advancement of economic theory in relation to statistics and mathematics. The Econometric Society Monograph Series is designed to promote the publication of original research contributions of high quality in mathematical economics and theoretical and applied econometrics.

Other titles in the series: G. S. Maddala Limited dependent and qualitative variables in econometrics, 0 521 33825 5 Gerard Debreu Mathematical economics: Twenty papers of Gerard Debreu, 0 521 33561 2 Jean-Michel Grandmont Money and value: A reconsideration of classical and neoclassical monetary economics, 0 521 31364 3 Franklin M. Fisher Disequilibrium foundations of equilibrium economics, 0 521 37856 7 Andreu Mas-Colell The theory of general economic equilibrium: A differentiable approach, 0 521 26514 2, 0 521 38870 8 Truman F. Bewley, Editor Advances in econometrics – Fifth World Congress (Volume I), 0 521 46726 8 Truman F. Bewley, Editor Advances in econometrics – Fifth World Congress (Volume II), 0 521 46725 X Herve´ Moulin Axioms of cooperative decision making, 0 521 36055 2, 0 521 42458 5 L. G. Godfrey Misspeciﬁcation tests in econometrics: The Lagrange multiplier principle and other approaches, 0 521 42459 3 Tony Lancaster The econometric analysis of transition data, 0 521 43789 X Alvin E. Roth and Marilda A. Oliviera Sotomayor, Editors Two-sided matching: A study in game-theoretic modeling and analysis, 0 521 43788 1 Wolfgang Hardle,¨ Applied nonparametric regression, 0 521 42950 1 Jean-Jacques Laffont, Editor Advances in economic theory – Sixth World Congress (Volume I), 0 521 48459 6 Jean-Jacques Laffont, Editor Advances in economic theory – Sixth World Congress (Volume II), 0 521 48460 X Halbert White Estimation, inference and speciﬁcation, 0 521 25280 6, 0 521 57446 3 Christopher Sims, Editor Advances in econometrics – Sixth World Congress (Volume I), 0 521 56610 X Christopher Sims, Editor Advances in econometrics – Sixth World Congress (Volume II), 0 521 56609 6 Roger Guesnerie A contribution to the pure theory of taxation, 0 521 23689 4, 0 521 62956 X David M. Kreps and Kenneth F. Wallis, Editors Advances in economics and econometrics – Seventh World Congress (Volume I), 0 521 58011 0, 0 521 58983 5 David M. Kreps and Kenneth F. Wallis, Editors Advances in economics and econometrics – Seventh World Congress (Volume II), 0 521 58012 9, 0 521 58982 7 David M. Kreps and Kenneth F. Wallis, Editors Advances in economics and econometrics – Seventh World Congress (Volume III), 0 521 58013 7, 0 521 58981 9 Donald P. Jacobs, Ehud Kalai, and Morton I. Kamien, Editors Frontiers of research in economic theory: The Nancy L. Schwartz Memorial Lectures, 1983–1997, 0 521 63222 6, 0 521 63538 1 A. Colin, Cameron and Pravin K. Trivedi Regression analysis of count data, 0 521 63201 3, 0 521 63567 5 Steinar Strøm, Editor Econometrics and economic theory in the 20th century: The Ragnar Frisch Centennial Symposium, 0 521 63323 0, 0 521 63365 6 Eric Ghysels, Norman R. Swanson, and Mark Watson, Editors Essays in econometrics: Collected papers of Clive W. J. Granger (Volume I), 0 521 77297 4, 0 521 80401 8, 0 521 77496 9, 0 521 79697 0 Eric Ghysels, Norman R. Swanson, and Mark Watson, Editors Essays in econometrics: Collected papers of Clive W. J. Granger (Volume II), 0 521 79207 X, 0 521 80401 8, 0 521 79649 0, 0 521 79697 0 Cheng Hsiao, Analysis of panel data, second edition, 0 521 81855 9, 0 521 52271 4 Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky, Editors Advances in economics and econometrics – Eighth World Congress (Volume 1), 0 521 81872 8, 0 521 52411 3 Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky, Editors Advances in economics and econometrics – Eighth World Congress (Volume III), 0 521 81874 5, 0 521 52413 X

Advances in Economics and Econometrics Theory and Applications, Eighth World Congress, Volume II

Edited by Mathias Dewatripont Universite´ Libre de Bruxelles and CEPR, London Lars Peter Hansen University of Chicago Stephen J. Turnovsky University of Washington

32 Avenue of the Americas, New York ny 10013-2473, usa

Cambridge University Press is part of the University of Cambridge. It furthers the University’s mission by disseminating knowledge in the pursuit of education, learning and research at the highest international levels of excellence.

www.cambridge.org Information on this title: www.cambridge.org/9780521818735 © Mathias Dewatripont, Lars Peter Hansen, and Stephen J. Turnovsky 2003 Th is publication is in copyright. Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press. First published 2003 A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data Advances in economics and econometrics : theory and applications : eighth world Congress / edited by Mathias Dewatripont, Lars Peter Hansen, Stephen J. Turnovsky. p. cm. – (Econometric Society monographs ; 2003.) isbn 0-521-81872-9 (v.1) – isbn 0-521-52411-3 (pb.) – isbn 0-521-81873-7 (v.2) – isbn 0-521-52412-1 (pb.) – isbn 0-521-81874-5 (v.3) – isbn 0-521-52413-x (pb.) 1. Econometrics – Congresses. 2. Economics – Congresses. I. Dewatripont, M. (Mathias) II. Hansen, Lars Peter. III. Turnovsky, Stephen J. IV. Econometric Society. World Congress (7th : 1995 : Tokyo, Japan) V. Series. hb139 .a35 2003 330 – dc21 2002071258 isbn 978-0-521-81873-5 Hardback isbn 978-0-521-52412-4 Paperback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate.

Contents

List of Contributors page ix Preface xi

1. Sorting, Education, and Inequality 1 raquel fernandez´ 2. Wage Equations and Education Policy 41 kenneth i. wolpin Empirical and Theoretical Issues in the Analysis of Education Policy: A Discussion of the Papers by Raquel Fernandez´ and by Kenneth I. Wolpin 73 costas meghir 3. Toward a Theory of Competition Policy 82 patrick rey 4. Identiﬁcation and Estimation of Cost Functions Using Observed Bid Data: An Application to Electricity Markets 133 frank a. wolak 5. Liquidity, Default, and Crashes: Endogenous Contracts in General Equilibrium 170 john geanakoplos 6. Trading Volume 206 andrew w. lo and jiang wang A Discussion of the Papers by John Geanakoplos and by Andrew W. Lo and Jiang Wang 278 franklin allen 7. Inverse Problems and Structural Econometrics: The Example of Instrumental Variables 284 jean-pierre ﬂorens 8. Endogeneity in Nonparametric and Semiparametric Regression Models 312 richard blundell and james l. powell

viii Contents

Endogeneity and Instruments in Nonparametric Models: A Discussion of the Papers by Jean-Pierre Florens and by Richard Blundell and James L. Powell 358 manuel arellano

Index 365

Contributors

Franklin Allen Costas Meghir University of Pennsylvania University College, London and Institute for Fiscal Studies Manuel Arellano CEMFI, Madrid James L. Powell University of California at Berkeley Richard Blundell University College, London and Institute Patrick Rey for Fiscal Studies IDEI, University of Toulouse Raquel Fern´andez Jiang Wang New York University, CEPR, and NBER Massachusetts Institute of Technology and NBER Jean-Pierre Florens University of Toulouse Frank A. Wolak Stanford University John Geanakoplos Yale University Kenneth I. Wolpin University of Pennsylvania Andrew W. Lo Massachusetts Institute of Technology and NBER

Preface

These volumes contain the papers of the invited symposium sessions of the Eighth World Congress of the Econometric Society. The meetings were held at the University of Washington, Seattle, in August 2000; we served as Program Co-Chairs. Volume 1 also contains an invited address, the “Seattle Lecture,” given by Eric Maskin. This address was in addition to other named lectures that are typically published in Econometrica. Symposium sessions had discus- sants, and about half of these wrote up their comments for publication. These remarks are included in the book after the session papers they comment on. The book chapters explore and interpret recent developments in a variety of areas in economics and econometrics. Although we chose topics and authors to represent the broad interests of members of the Econometric Society, the se- lected areas were not meant to be exhaustive. Wedeliberately included some new active areas of research not covered in recent Congresses. For many chapters, we encouraged collaboration among experts in an area. Moreover, some sessions were designed to span the econometrics–theory separation that is sometimes evident in the Econometric Society. We followed the lead of our immediate pre- decessors, David Kreps and Ken Wallis, by including all of the contributions in a single book edited by the three of us. Because of the number of contributions, we have divided the book into three volumes; the topics are grouped in a manner that seemed appropriate to us. We believe that the Eighth World Congress of the Econometric Society was very successful, and we hope that these books serve as suitable mementos of that event. We are grateful to the members of our Program Committee for their dedication and advice, and to Scott Parris at Cambridge University Press for his guidance and support during the preparation of these volumes. We also acknowl- edge support from the ofﬁcers of the Society – Presidents Robert Lucas, Jean Tirole, Robert Wilson, Elhanan Helpman, and Avinash Dixit – the Treasurer, Robert Gordon, and Secretary, Julie Gordon. Finally, we express our gratitude to the Co-Chairs of the Local Organizing Committee, Jacques Lawarree and Fahad Khalil, for a smoothly run operation.